The U.S. dollar surged to a new 20-year high on Thursday, prompting a fall in gold prices and June Comex gold futures closing at $1,820.40 an ounce, down 1.7 percent on the day. Meanwhile, the US Dollar Index rose to a fresh 20-year peak of 104.80 before retreating slightly to 104.60.
“The dollar has firmly positioned gold in the danger zone, and a break below $1,800 may lead to greater technical selling,” says Edward Moya. “Until the dollar’s advance ends, gold won’t be able to grab anyone’s attention.”
The price drop for gold comes as the US stock market has been declining. Fears about the Federal Reserve’s ability to combat inflation without causing a recession have prompted investors to shift toward risk-off mentality.
TD Securities strategists believe that the broad market selloff is making a liquidity vacuum, which has also been affecting gold.
“At a time when liquidity is limited, the substantial selling flow has continued to weigh on gold,” the strategists said. “Prices are now fighting to maintain the bull-market-era defining uptrend under increased pressure from this selling flow… And with the Fed telegraphing every move they make, positioning analytics will be crucial as market continues to squeeze participants following bearish sentiment.”
Markets also took in the confirmation of Federal Reserve Chair Jerome Powell for a second term on Thursday by the US Senate, which passed it with an 80-19 vote. After the Federal Reserve announced a 50-basis-point rate increase in May, broad support for Powell was evident.
According to the CME FedWatch Tool, the markets are presently pricing in a 93 percent chance of another 50-bps increase in June and a 90 percent probability of another 50-bps boost in July.
“Because wage expenses are increasing rapidly as a result of the labor market tightness, inflation is most likely to be higher than before the pandemic,” said Commerzbank’s Daniel Briesemann. “The Fed is thus under pressure to increase interest rates significantly. Our economists anticipate that the federal funds rate will rise by 50 basis points at each of the Fed’s following three meetings. The key rate is expected to reach 3 percent by year end.”